Given that almost 90% of Canadians expect to rely on CPP benefits to cover costs during retirement, it’s no surprise that they often ask, “How is CPP calculated?” However, this question can have two very different answers. The first is related to how Canada Pension Plan contributions are calculated (as well as how much employers contribute). The second question is, which CPP calculation formula do you use to work out how much CPP you’ll receive in retirement?
Let’s start by taking a look at how to calculate CPP contributions, including the CPP percentage that is taken off your income, the CPP premiums your employer should be making, how CPP is calculated in Ontario and other provinces, and when CPP stops being deducted.
CPP calculations for contributions
How CPP is calculated for contributions is considerably easier than calculating the CPP benefits you’ll receive when you retire. Therefore, you don’t really need to use a Canada Pension calculator (though we will discuss CPP calculators later, for working out your CPP pension benefits).
Step one of the Canada pension calculation for contributions is to find the basic yearly exemption for the current year: for 2021, it is $3,500. Step two in calculating CPP contributions is to divide the basic yearly exemption by the number of pay periods in the year. These could be weekly, bi-weekly, monthly, etc. This basic exemption chart will give you the amount for different pay periods and help you with your CPP calculations.
Step three to calculate Canada Pension contributions is to work out your total pensionable income. For the purpose of CPP calculations, your total pensionable income is your gross pay for that pay period, plus any taxable benefits and allowances you receive.
Step four of the CPP calculation formula is to deduct the pay period exemption from your total pensionable income. The final step in calculating CPP contributions is to multiply the result of step four by the current CPP contribution rate (for 2022, this CPP percentage is 5.7%).
How CPP is calculated for contributions: an example
Veronique earns $5,000 per month gross, and the basic monthly exemption amount is $291.66. She receives no taxable benefits or allowances.
$5,000 – $291.66 = $4,708.34
$4,708.34 x 0.057 = $268.38 total monthly contribution to CPP
This is how CPP is calculated in Ontario and all other provinces and territories. When does CPP stop being deducted? When you retire and start drawing your CPP pension.
How is CPP calculated for employer contributions?
You definitely don’t need a CPP calculator to calculate employer calculations. Your employer will take your CPP premiums directly from your pay, then add the exact same amount as the contribution and submit the total to the government.
Now we’ve covered Canada pension calculations for contributions, let’s take a look at how to calculate the Canada Pension benefits you’ll receive in retirement.
How is CPP calculated for retirement income?
A Canadian pension calculator comes in very handy when you want to calculate the Canada Pension benefits you’ll receive when you retire, especially if you are many years away from retirement.
Calculating the CPP you’ll receive begins by going to your My Service Canada account to find your statement of contributions, which you’ll need to calculate your Canada Pension amounts. You can ask for an estimate of what you’ll receive in CPP from your My Service Canada account.
If you’re close to retirement, this is a pretty close approximation of what you’ll receive once you start to draw your pension. If you don’t expect much to change between now and retiring, this estimate should suffice: you wouldn’t need to try and calculate CPP benefits yourself or use a Canada Pension calculator.
If there are many years before your retirement, the formula to calculate CPP payments is very complex and difficult to do without a Canadian pension calculator. Let’s take a closer look at that formula.
CPP calculation formula for payments
First of all, calculate the number of months you have contributed to CPP (the period begins the month after you turn 18, up until the month before you retire). For example, if you contributed every month between the ages of 18 and 60, you would have 504 contributory months.
Use your statement of contributions to get your pensionable earnings for each year then divide that amount by that year’s maximum pensionable earnings. Next, you multiply that amount by the average maximum pensionable earnings for the five-year period leading up to the year when you intend to start drawing CPP. This is meant to bring your average earnings up to a modern-day value.
You then add up all of the annual pensionable earnings for each year that you contributed.
Adding dropout provisions
This is where CPP calculations get even more complex. You are allowed to discard (or drop out) years where you were earning low pay and/or years that you took off work to raise a family. Once you’ve done this, you need to divide your total pensionable earnings by the number of contributory months (having deducted your dropout months and dropout income from this calculation).
Take that amount and multiply it by 25%: this will then give you your monthly CPP pension benefit. For most people who aren’t math experts, these CPP calculations can be very tricky without the help of a CPP calculator.
Using a Canadian pension calculator
In Canada, pension calculations are so complex that CPP calculators are a godsend. One pension calculator in Canada that is often used is the retirement income calculator provided by the Canadian government.
For these Canada Pension calculations to be accurate, you’ll need the following:
- Your CPP Statement of Contributions/QPP Statement of Participation
- Employer pension details if you have one
- Recent RRSP statements if applicable
- Statements for other savings, such as annuities
This Canada Pension calculator will then work out:
- Your CPP pension payments from the date you choose to retire
- Your Old Age Security (OAS) pension
- Estimates of retirement income from other sources
The impact of receiving a CPP Disability Pension
If you received a CPP Disability Pension at any point, this will affect how much CPP benefits you receive.
Firstly, all the months in which you received the disability pension will be deducted from your contributory period. Secondly, it will affect how your adjusted pensionable earnings are calculated: they will be based on the average year’s maximum pensionable earnings for the year you started receiving the disability pension, rather than the year you started drawing your CPP pension.
How to boost your CPP benefits
After using a Canada Pension calculator, you may discover that the amount of income you’ll receive when you retire will not finance the kind of retirement you’d dreamed of.
While the maximum monthly CPP benefit payment for 2022 is $1,253.59, the average payment that Canadians receive is just $702.77. Even with OAS and other pension savings, many Canadians have to live off very low income in retirement compared to when they were working.
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